Chapter 26 - Negotiating IT Contracts

26.2 Conducting negotiations

Once the preparation, risk analysis, negotiation strategy and assignment of roles are complete, it is time to enter into negotiations with the supplier(s). It is recommended that the agency negotiate with more than one supplier deemed to be fully qualified and best suited among those submitting proposals. It may be helpful to inform the supplier(s) that negotiations are being conducted with others, but never name the competition. While every negotiation is unique, there are some common practices that should be followed.

Prepare an agenda for the meeting. Items might include an introduction, supplier presentation, issues identification, common ground, negotiation topics, problem solving, and wrap up. Send the agenda to all participants prior to the meeting.

Negotiate with the right people. Verify that the supplier representatives you are meeting with have the authority to make decisions and commit their company to agreements.

Avoid quick and hurried negotiations. Informing the supplier about internal deadlines or restrictions may not be to the agency’s best interest, unless possible impacts and concessions have been evaluated and included in the negotiation strategy.

Confirm all of the requirements, expectations and supplier promises in writing. These are based on the solicitation and the supplier’s proposal. Include these as part of your final contract.

Use the agency's approved contract form. Customize the agency’s contract template as needed with final negotiations. Do not allow the supplier to provide the contract form or any drafting assistance.

Use consistent terminology. Make sure all parties use the same terminology to avoid conflicts and misunderstandings.

Lock down the scope of the work to be performed. Be sure to include services, related costs and all performance levels to be met by the supplier. Most IT suppliers are willing to negotiate performance-based standards. All customer requirements as well as how the supplier plans to meet those requirements should be fully negotiated and included in the contract.

Strive for a "win-win" negotiation outcome. Be flexible in negotiations and willing to yield on points that are not critical. The purchasing agency’s negotiation strategy should identify critical and non-critical negotiation points and the value that should be attached to each. Obtain concessions in the right places. Talk with the supplier’s references and learn what the supplier’s sticking points were during their negotiations. If a supplier is known to be inflexible about its service pricing, for instance, get concessions in other areas, such as license fees. Strategically plan your trade-offs.

Protect your agency’s and the Commonwealth’s interests. Conduct a thorough review of the contract, including legal review. If possible, have a peer and an attorney provide input prior to and during your negotiations to reduce the possibility of re-work after negotiations have been completed.

Do not be undersold. To set a realistic pricing target for negotiation, conduct a market survey or contact other customers of the supplier who had/have similar projects to obtain their pricing agreement.

Use payments as leverage. Negotiate supplier payments based on certain performance milestones and written formal acceptance by the agency. Payments tied to milestones provide an incentive to the supplier to ensure that the project meets the schedule, the price and the solution, service or product acceptance requirements. Final acceptance payment should not be released until after the agency completes testing, confirming that the system meets all performance requirements, and is able to use it in a production mode.

Identify key personnel in the contract. If the solution being provided includes key supplier personnel (project manager, technician, etc.) that are critical to the project’s success, make sure they are clearly identified in the contract. Make sure that the contract includes language requiring that the agency must approve any changes to supplier personnel.

Consider the project's future needs. Agency needs may change over time. License fees for future additional seats should be included in whatever volume discount is negotiated as part of the initial contract. The time to negotiate these issues and any other foreseeable points is before the contract is signed.

Protect the Commonwealth's investment. Protecting the IT investment should cover the project’s lifespan, (i.e., total cost of ownership) and should be given due negotiation consideration. The agency should negotiate supplier support from post-warranty maintenance and support to source code availability and access in the event of certain unforeseen events, as well as post-contract transition services. Depending on the hardware and/or software components that compose an IT project, the life span of those individual components may range anywhere from two to 20 years. It is advisable to:

Negotiate terms and prices of post-warranty maintenance and support.

Negotiate terms for placing the software source code into an approved escrow account;

Negotiate the right to recruit the supplier's technical staff to support the product or provide transition services in the event the supplier ceases doing business, goes bankrupt, is acquired by another company or the contract is terminated early for any reason.

Beware of "evergreen" clauses. Evergreen clauses are automatic renewal clauses that extend the contract. Some suppliers will want to include clauses that automatically extend the term of a service agreement if the supplier does not receive notice of contract termination by a certain date. While some suppliers defend this policy as a customer convenience to prevent gaps in service, it could also mean that an agency could be obligated to pay for service that is no longer needed. Refer to § 2.2-4309 of the Code of Virginia for statutory guidance on contract modifications.

Defining the scope of the deal is often more difficult than either the agency or supplier expect. In the case of hardware, this includes not only the product specifications, but also the cost of training, the terms of service and/or warranties and the cost of any professional services required to integrate the equipment into an existing environment. For software, the agreement should define the license cost and the costs of support, training, patches/ upgrades and professional services associated with implementation, integration or customization.

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